OECD transfer pricing guidance on financial transactions

On 11 February 2020, the OECD published, for the first time, dedicated transfer pricing guidance on the treatment of financial transactions. The guidance, which runs to some forty-four pages and covers a wide range of aspects of financial transactions, will be welcomed and should help to manage future transfer pricing disputes.

Background

In October 2015, the OECD published reports on its fifteen Action Plans under the BEPS project. Action 4 covered base erosion issues around interest deductions and other financial payments whilst Actions 8-10 focussed on aligning transfer pricing outcomes with value creation. Both of these reports required follow up work on the transfer pricing aspects of financial transactions. Following the publication and review of a public discussion draft in 2018, the new guidance is the culmination of work carried out by the OECD in the four years following the original BEPS reports.

New Transfer Pricing guidance

The guidance is divided into a number of sections.

Section B provides guidance on how the principles determining the accurate delineation of transactions in the OECD Transfer Pricing Guidelines apply to the capital structure of an MNE within an MNE group, including its balance of debt and equity funding. It also clarifies that the guidance does not prevent countries from implementing approaches to address capital structure and interest deductibility under their domestic legislation. Section B also outlines the economically relevant characteristics that inform the analysis of the terms and conditions of financial transactions.

Sections C, D and E address specific issues relating to the pricing of financial transactions (e.g. treasury functions, intra-group loans, cash pooling, hedging, guarantees and captive insurance). This analysis elaborates on both the accurate delineation and the pricing of the controlled financial transactions.

Finally, Section F provides guidance on how to determine a risk-free rate of return and a risk-adjusted rate of return.

The guidance contains a number of examples to illustrate the principles to be used for the transfer pricing aspects of financial transactions.

The new guidance will be added to the existing OECD Transfer Pricing Guidelines as a new Chapter X.

Comment

This is the first time that the OECD Transfer Pricing Guidelines has included specific, dedicated analysis and guidance of the transfer pricing aspects of financial transactions. The new guidance should be welcomed and will, in principle, help to manage future disputes arising between tax authorities and taxpayers in this complex area.

For an article published by our transfer pricing team, see “New OECD Guidance on Transfer Pricing Aspects of Financial Transactions”.